Correspondence

Comvita New Zealand Limited, Wilson Road South,

Private Bag 1, Te Puke, New Zealand

 

4 June 2009

 

Mr Bruce Sheppard

Chairman

NZ Shareholders Association

PO Box 6310

Dear Bruce

 

Thank you for your letter of 21 May 2009. Our published Result for the year ended 31 March 2009 is enclosed.

 

We are comfortable to address the specific issues you raised but would like you to note the following:

 

1.             Our Bankers, Westpac, are fully informed of our progress and we have open discussions on a regular basis with them. Our most recent formal review with them was in March 2009. We are currently operating within all our Bank covenants. At no time have they indicated any ‘discomfort’ with the level of our borrowings or put us under pressure to raise additional equity. We believe the level of disclosure to our shareholders on a business and an overall basis is appropriate and adequate.

 

2.             Comvita is a high growth company. Our five year compounded average revenue growth rate is over 25% per annum. As you will see in our report we are showing no signs of slowing down even in these uncertain times – quite the contrary. Westpac has worked closely with Comvita over a long period of time and throughout all phases of our growth including the acquisitions we made in 2007 and 2008. While formal covenants are vitally important to protect the bank’s interest, Westpac is also interested in our future cashflow projections several years ahead.

 

 

3.             Comvita is unusual in that it carries a very high level of inventory, approximately $21m at the end of March. Nearly half of this inventory is bulk manuka honey which is unusual in that it has no practical expiry date and it grows in value during storage. This high level of raw material is based around the historic view that the Company needed to hold at least 12 months worth of honey to guard against a poor harvest and/or very strong market demand. This requirement has been reviewed with the objective of reducing inventory now that we are more understanding of the influences around market supply and demand for manuka honey. We have negotiated longer term supply arrangements with our key suppliers accordingly.

 

 

4.             In the calculations below, we have used EBITDAF as the appropriate earnings opposed to EBITDA. This obviously improves the ratios but it also eliminates the non-financial impairments, fair value movements and amortization that from a banking perspective are eliminated in their own assessments of Comvita.

 

In summary, the ratios you have proposed as being acceptable/not acceptable etc do not always apply in every business situation, especially not for a company such as ours which has been through a recent acquisition/expansion programme and is seen to grow revenue and EBIT margins even in a tough market environment.

 

In the table below, we have set out the four ratios that you have identified as critical based on 2009 results. We have already advised the market that we have repaid $2.5m in debt in March this year and we expect to pay at least this amount in the next year from earnings and/or inventory reduction. Most of this will be voluntary reductions as opposed to reductions imposed by the Bank.

 

 

In order that you gain a full picture of the confidence Directors have in Comvita’s current level of borrowings, I refer you to our comments to the market of Tuesday 2 June 2009 where we disclose more than 25% revenue growth in the last three months compared with a year previously. This revenue growth is a function of Comvita’s strong brand but also its presence in the natural nutraceutical space where growth has continued even in this current recessionary environment. We are unusual in the NZ context in that we own or control the majority of our channels either to the wholesale or retail markets in the main regions in which we operate. This ownership/control of the market channels provides higher gross margins and the fixed cost structure involved means that the conversion of revenue to earnings once we cover our core fixed costs is significant and growing.

 

While not specifically covered by your letter, I think there is a benefit of commenting on the improvement in gross margin from 42.5% in the 15 months to end of March 2008, to 52.2% to the end of March 2009. This is the result of both the acquisitions we have made, the investment in offshore wholesale and retail activities, the decline in the NZ$ and the evolving product mix. It is this restructuring of the business plus effective management of offshore costs, manufacturing and inventory and the underlying growth in revenue which gives the confidence to the Directors, and to our bankers, that Comvita is well placed to manage the debt and interest which is the focus of your concern.

 

 

Yours sincerely

 

 

 

 

Chairman